Slash superannuation tax concessions

by
Sophie Schroder |
23 Apr 2014

The cost of superannuation tax concessions will experience “staggering” rises year on year and must be slashed before it becomes a drag on Australia’s finances.

This is according to independent public policy think tank The Australia Institute, which yesterday published a research paper called sustaining us all in retirement that supports a change to a universal aged pension.

The report is particularly timely given Treasurer Joe Hockey’s recent speech in Washington that indicated the Australian Government will raise the retirement age and crack down on the eligibility for the age pension as part of an urgent effort to trim, cut or scrap unsustainable expenditure.

It seems the cut dates for this are imminent and federal government's Commission of Audit report will be released publicly within days, the Sydney Morning Herald reported.

But The Australia Institute says that the tax concessions, most of which are being claimed by people able to afford early retirements if they choose, need the most urgent attention as they will soon cost more than the entire age pension.

The paper said the age pension currently costs $39 billion and superannuation tax concessions will cost the budget around $35 billion in 2013-14.

These concessions are the projected to rise to $50.7 billion in 2016-17, an increase of around 12% a year. By this time superannuation tax concessions will be the single largest area of government expenditure, it stated.

“The overwhelming majority of this assistance flows to high income earners. Low income earners receive virtually no benefit,” the paper said. “The combined cost of these two policies will be $74 billion in 2014 alone.”

Rather than trimming and slashing expenditure to address this problem, The Australia Institute suggests a completely different model altogether.

The paper proposes that Australia abolishes tax concessions for superannuation and creates a universal (non-means-tested) age pension.

It claims that a universal pension would create a level playing field amongst income groups and reduce the inequality in Australia’s retirement system.

Superannuation could then act as a top-up for those who can afford it, the paper said.

“It is suggested that the single pension be lifted from 30% of male total average weekly earnings to 37.5 per cent, with a consequent lift in the partnered rate. This would raise the pension rate for singles from $21,018 per annum to $26,273 per annum and the pension rate for couples from $31,689 per annum to $39,611 per annum,” it stated. “This system would cost $52 billion a year, almost 30% less than we spend on both the pension and superannuation tax concessions.”

Adviser B, anyone paying at least the lowest marginal tax rate is better off having their investments inside super after the first year when earnings are taxed at 15% not 19%+ if they were added to their taxable income. They're better off having it taxed at 15% as a contributions tax in year 1 provided they're earning at least enough to qualify for the lowest tax rate anyway - and if they're NOT earning that, it's unlikely they're earning enough to be receiving any significant SGCs anyway! If they're earning between $5,400 p.a. (the annualised minimum monthly wage to be receiving SGCs) and $18,200 p.a. the biggest threat to their future retirement isn't the tax on their superannuation, it's the fact that they're living well below the poverty line and will never be in a position to be a self-funded retiree.

Yes, the relative benefit of super tax concessions IS lessened for those on lower marginal tax rates, not because they are unfairly penalised while others are 'rewarded' but because they are not penalised as severely as high income earners that pay a much higher level of tax than they do.

Your attitude towards tax concessions for those on the highest marginal tax rates as some sort of charitable benevolence towards the wealthy completely ignores the fact that it's them that carry the country and contribute the most as individuals to the income tax pot, even once the 'taxpayer gifts' (presents from and to themselves, it's worth noting) are taken into account.

Welfare in Australia is already too generous to the parasites and too hard on the genuinely needy. Your Robin Hood act would be much better received if you were targeting those that exploit the system and take bites out of the pie they don't deserve, and not targeting the people contributing to the size of the pie by telling them it needs to be bigger and therefore they keep less of what they've earned.

Romney got crucified in the US for talking down the 47% of the population dependent on the government - what's our percentage? Where does the line truly sit for those that consume more government funds than they contribute?

You can keep talking about the inequity of it all if you want, but your argument makes no sense - "Those that don't contribute anything don't get enough!"

I'm all for screwing down true tax minimisation utilised by the richest far beyond what they need - circumventing contribution limits to SMSFs through loan agreements to purchase assets within the fund, income streaming through trusts and hey, why not evaluate scrapping the CGT discount while we're at it? That doesn't benefit the poor and it might help put downward pressure on property. What you're up in arms about, however, is not the real root of the problem.

Andrew on
28/04/2014 4:35:21 PM

Adviser B advice is provided based on the law. My understanding is the laws are in place with no time limit and will stay that way until the parliament changes the laws.

The law is the law and politics is posturing.

If the previous government did enact these laws with a time limit then I apologise however none of the resources that I read refers to a time limit or time frame on these laws.

If the new government is posturing on changing the laws well that is what it is.

I agree with you that the system is fairer now than before and that is the way it will be until changed so hopefully it will be for the next 20 years. I did state in my first post that the pension funds should be taxed at 15% in the fund as they were before.

Are the super laws perfect no. If both sides of politics are complaining then it is probably a good law the way it is.

Adviser Bon
28/04/2014 2:22:04 PM

Apologies Andrew, the changes did get implemented - for the last financial year only.

The article, and my musings, were based on 2013/14 and beyond. With all the changes and politicising of super and finance industry, including FOFA, my memory starts to get confused between proposals, implemented (and backdated), and implemented but not enforced due to being removed immediately etc (ie, FDS requirements).

The current government are hellbent on repealing these changes to super, and backdate it to July 1 2013.

So in essence, the fairer system with LISC etc existed for an entire year. Given that the concessional rules in terms of a flat 15% will return to what they are and always have been (except for 2012/13), my overall point remains.

Compulsory super began in 1992 from memory, and only for one financial year has a measure of fairness been implemented to the concessional rates, so it's more convenient to judge the system based on what it is for 20 out of 21 years.

Oh, and the top marginal tax rate begins at $180,001, so even under that one outlying blip of a financial year, those earning $180,001 - $299,999 were receiving a 31.5% taxpayer gift, and even on previous caps of $50,000.

So I stand by my claims of the concessions and their inequity, as they are returning to what they were, and due to the backdate to July 1 2013, are correct for this financial year and the immediate next few.

The Australian Institute I figure would have also based their figures on the expected current rates too, as they were discussing concessional costs to the taxpayer for this financial year, not the previous one.

Andrew on
28/04/2014 1:18:34 PM

Adviser B do you want to tell my clients that have just sent authorities to their super funds to deduct and pay to the ATO an additional $3750 tax on their SG Super conts which is incredibly 15% of the $25,000 that went into the fund that it is just a proposal. The funds needed to be paid to the ATO by 15 April. Perhaps this journal will contact the ATO and see how much money has come in as that would add some balance to the debate.

The laws are laws and inforce from July 2012 as per my previous writing relating to this article.

Just for absolute clarity I also went to one of the low income earning clients and they have had the $500 co cont come through and another $130 Government cont which is the refund of the $130 Conts tax that was deducted from their fund.

Adviser B these proposals that you speak of are in fact laws and are working as we speak.

Adviser Bon
28/04/2014 11:45:05 AM

Martin, we are both capitalist and socialist - a PURE capitalist society would have no welfare at all. And I don't agree that sooo much of our welfare should be directed towards the rich - you talk about becoming a welfare state, but are fine with the richest receiving much of that welfare. The middle class are what drives the economy, this has been proven empirically time and time again in dozens of real life scenarios. Penalising the poor, whilst directing so much taxpayer money to the rich as a 'bonus reward' does not make sense for the overall economy.

I agree that the welfare mentality needs to be broken - starting with those who are most addicted to the welfare - the receivers of the generous tax concessions/gifts.

By penalising the poor for contributing to super, it means less super, and therefore more likely to need welfare. Penalising the poor just makes it more likely we will be the welfare state you fear so much.

Btw, SGC is part of an employees package/entitlement. Just because the employer pays it on the employees behalf, doesn't mean it is not part of the employees overall wage. So SGC is a portion of an employees wage that is forced to be put aside, just because they employee doesn't receive it first and then physically pay it doesn't mean they are not paying it. If I salary sacrifice, does that mean 'it does not affect the cashflow of the recipient' based on the fact the employer pays it direct to the super fund and I never physically receive the money? Of course not.

The majority of Australians are not earning only $18,200 or below, nor are the majority on the highest tax bracket - I chose the extremes to highlight the differences and absurdity - however, the principle still applies to everyone who is in between the 0% and 46.5% tax brackets - that the richer you are, the more taxpayer money you are receiving.I support having minimal barriers to becoming rich, but actual substantial rewards for becoming rich (the 'women of caliber' paid parental scheme comes to mind) is grossly unfair and corrupt.

This isn't about penalising the rich, but rather reducing their SUBSTANTIAL taxpayer funded welfare. It's not about rewarding the poor, but rather removing the PENALTIES they face for being poor, in terms of super. I still support a reward/incentive for building super, but just to make it more fair as opposed to the current system designed to drastically give taxpayer funds to the rich.

I am not sure what, if any, encouragement the Australia Institute suggests for super, without researching their report in detail.But, assuming the Australia Institute has done their figures correctly, they show that $22 billion would be saved. That's $22 billion given away to those who need it least. And even still, the rich would still get the same level of welfare as anyone else in their scenario, just not $22 billion more.

If you were genuinely against welfare, you would be against welfare for both poor and rich. Supporting SUBSTANTIAL welfare for the rich only, whilst bemoaning the fact that the poor get welfare is hypocritical, and suggests a set of priorities that I am proud to say I strongly oppose.

Martin Bon
28/04/2014 10:53:14 AM

Adviser B, the last time I looked outside we were a capitalist based society not a socialist society. We reward those that can and do help themselves first. If we don't then we risk become a third world economy and virtually an underfunded welfare state. Low income earners are not forced to pay SGC, this is the legal responsibility of the employer. They pay the SGC and yes it is taxed at 15%. It does not affect the cashflow of the recipient. And the majority of Australians are not on an income of $18,200. There has to be some encouragement for the majority of Australians to break the ever increasing welfare mentality that comes from simply being provided an income for not working.

Adviser Bon
28/04/2014 10:11:49 AM

Andrew, I think you have gotten confused with PROPOSED changes suggested by Labor - ie, refunding or zero super tax for low income earners, and high income earners paying 30% super tax, with REAL and IMPLEMENTED changes.

These 'facts' you have mentioned were nothing more than suggestions by the previous government to help equalise the super system - they have not come into force; are hard to implement - as the super funds need to discover their client's taxable income first before they can apply any tax implications on concessional contributions; and may never see the light of day.

Currently, super tax on concessional contributions is a flat 15% for everyone. There is a concessional cap of $25,000, which in 9 weeks rises to $35,000.

So, a person who contributes the soon to be max cap of $35,000, instead of paying 46.5% in tax, ($16,275), they pay 15% ($5,250). This represents a tax concession (ie, taxpayer funded gift) of $11,025.

Compare that to someone who's wage is too low to tax - ie, someone earning $18,200 p.a. They are forced to pay SGC, and are taxed $252 more than they would otherwise be. It costs the low income earner more to put into super than it does to receive it as income, whilst the richer person is given $11,025. Who needs the money more? $11,025 to a rich person will not make or break them, but $11,025 would make a world of difference to a poor person. I would suggest giving the rich taxpayer's money as a 'reward' for being rich is not equitable, whilst penalising the poor further as a punishment for being poor is not needed. Being rich is reward enough, and being poor is punishment enough, without the government further striving to make the rich richer and the poor poorer.

Andrew on
24/04/2014 7:51:35 PM

Adviser B why would the low income earner claim a tax deduction for a contribution when they can get a co cont and get a risk free 50% return on their investment and no conts tax ?

If they are a low income earner and they qualify then they will get up to $500 conts tax refunded on employer or concessional conts which covers the conts tax on $3000 contribution so you are being over dramatic with the language and a little light on the facts. With the Co Cont option as well there are some good benefits from seeking advice. Do you think the think tank understand these nuances in the system ?

Income earners above $300k are paying 30% contributions tax not 15% so this alarming gap you speak of is not as alarming either and this has been the case since Jul 2012.Depending on their age the $300k + salary earner is not getting the 9.25% SG cont either due to the limits and the employers dont pay them the difference. I am not saying anyone is complaining however more facts are required in serious financial matters.High income earners like low income earners largely spend all their take home salary and without compulsory super they will have nothing which is a point that is missed now that the super system has worked well.

As far as the 15% tax rate in the super fund you pay a lower tax rate for preserving your money until retirement and why shouldnt that be the case? It would be naive to think that if the money wasn't in super it would be invested somewhere else in the in the non super environment paying the higher marginal tax rates. There is very little evidence to support that position in Australia. Australians have their house and their compulsory super and nothing else. If they have other assets they are normally geared heavily which is not savings.

High and low income earners pay the same tax rate on super earnings at 15% however if this feels unequitable imagine how will we feel under the Universal Pension scheme where someone with $6b gets the tax payer funded pension dollar for dollar as someone with $200 dollars.

I would re introduce the 15% tax on pensions back to the way they were and I would lift the concessional contributions for those over 50 to $50k per annum and would leave the rules steady for at least 10 years and let the system run.

Adviser Bon
24/04/2014 10:51:43 AM

And I forgot to mention the tax concessions provided to earnings that are achieved within superannuation - again, these concessions are designed to GREATLY benefit those with higher balances - ie, higher balances = higher growth = higher tax concessions = more taxpayer money gone.

So those with higher superannuation balances, ie the wealthy, are once again getting a LOT more taxpayer dollars, whilst again, the poorest wage earners are being penalised on whatever earnings their small balances in super make.

The system has been designed this way, by the rich, for the rich, and involves SIGNIFICANT waste of our taxpayer dollars. By all means end the 'Age of entitlement' - but start with those who receive the MOST entitlements but need it the least. The whole theory of directing so much taxpayer funds towards 'people of caliber' (ie the wealthiest few percentage) and penalising the poorest to do so, should be rectified.

But I won't hold my breath.

Adviser Bon
24/04/2014 10:36:38 AM

I think middle ground should be considered - I am all for incentives (ie, concessions) for contributing to super, however, disagree that the incentives should drastically favor the rich over the poor.

Our lowest wage earners are actually taxed an ADDITIONAL 15% for contributing to super. They are the people who will are more likely to require Centrelink benefits, yet they are being penalised heavily for putting funds into super. At the other end of the scale, the richest get a whooping 31.5% reward for placing funds in super. In short, if they place $100,000 into super as concessional contributions (over a few years due to caps), the taxpayer has given them $31,500 of this. Do the highest earners REALLY need an extra $31,500 of taxpayers money? Consider, given their income and wealth, even holding their capital outside super, they are unlikely to ever need Government assistance to get by.

Do the poorest REALLY need a 15% penalty for daring to contribute to super?

The current system is extremely flawed. And costly. And much of the cost is directed to assisting those that need help the least.

The idea put forth by Australia Institute does get rid of this ridiculous system of giving the bulk of taxpayer funds to the richest, so it is better than the current one. Cheaper, whilst helping those that need it most. However, I am not a fan of removing all incentives to placing money into super as suggested by the Australia Institute. Especially given the preserved nature of super as Sean pointed out - why would anyone lock money into an illiquid investment without an incentive to do so, given they can invest in the same investments but without any preservation rules?

Seanon
24/04/2014 6:33:57 AM

Jenni the rationale that it's ok to remove incentives because SGCs are compulsory is absolute garbage in my opinion. How many of the people we see are getting their desired outcome in retirement using SGC alone? What about the women with 8 years less in the workforce after looking after kids for a few years? Do you think they'll be fine with 12% of whatever work they do when they rejoin the workforce?

Endorsing a solution that makes the vast majority of Australians, some who are on track to be self-funded, given a pension by the government is mind-numbing.

The less of these policy levers and switches politicians have to control people the better. Plenty of people aren't looking for a handout in retirement, usually the same people that don't go straight to centrelink when they're between jobs because they don't want or need handouts.

These people that take ownership of their own lives should be rewarded not punished, and removing any incentives goes against that.

Remove the incentives and you can remove preservation rules with it. What idiot would put money in a bank account they can't touch, with access rules that are shifting goalposts based on the whims of people it doesn't affect, if there was no incentive?

Peter Blochon
23/04/2014 9:22:53 PM

A universal non means tested superannuation scheme that has existed since 1935 in NZ. it has proven sustainable and equitable. Why should it not be such in Australia. The current system with all the fees and compliance costs and legal tax avoidance through concessions is unsustainable. It exists for the benefit of the wealthy and relies upon the by-product of a gambling casino for its welfare. Every financial crash cripples those who have had there income compulsorily taken and gambled with. Memories seem so short.

Adviser Bon
23/04/2014 4:48:44 PM

Mock all you want - if their figures are correct, that's a SIGNIFICANT saving. And as Jenni pointed, add to the savings the reduced cost of administering Centrelink. (Loss of jobs in Centrelink is a separate issue).

Tax concessions that are aimed at benefiting the rich only (whether it be in super, or elsewhere, such as corporate tax concessions) need to be addressed.

I'm not against tax concessions for super, but admit is unfair that the rich get a 31.5% tax concession, whilst the vast majority of the population get either 0%, 5.5% or 19% as tax concessions. In these cases, it is the average and below earners who are subsidising the rich.

IF the figures are correct, the average Australian is subsidising the richest Australians to the tune of $22 billion.

Bobon
23/04/2014 3:03:22 PM

Scrapping Salary Sacrificing and Transition to Retirement, replacing it with Automatic Non Means Tested Age Pension for everyone would save Australia Trillions over the next 20 years.

Jenni Devlinon
23/04/2014 2:15:48 PM

I fully endorse the sentiments of the Australia Institute.As super is now compulsory, there is no need for incentives.Universal age pension gives all taxpayers what they want - the age pension in retirement!The suggested pension level is a more livable amount for those soley dependant on the age pension.Salary sacrifice up to $50,000 or $25,000 has only been possible for high income earners, never an option for most working people Think of all the time saved by not administering an income and assets test - time spent by pensioners feeling harassed by centrelink, the time spent by Centrelink employees administering these very complex rules. Would result in large savings in the social security staffing budget - if of course centrelink employees can get other jobs

Andrew on
23/04/2014 12:49:16 PM

A non means tested universal pension would mean that all Australians including the wealthy would be getting the aged pension and the think tank thinks that is going to save money.

No doubt they will throw SG out as wont be required with the universal pension and the employer will pay 9.25% higher wages and no one including the battlers will have any super savings.

Wages and super conts are both tax deductible to the employer so there is only the marginal savings in tax between the marginal tax rate and the 15% so not a huge benefit here compared to the cost of everyone on full pension with no need to save

People from the think tank need to get out of the tank and into the real world and talk to the battlers who have been paying their home loan off at $3,000 per month and completing their children's education obligations and now have some savings capacity and ask them what they think about the $25k and $35k limit on super contributions.

They are incredulous that the government is so stupid to have reduced the contributions limits and wonder how is anyone that lives in the real world is supposed to fund their retirement.

The ALP wonder why their primary vote is 27% when the same party has no idea who their supporters are and have successfully stopped them funding for their retirement calling them fat cats in the process.

These same people are now going to the real estate seminars, using their surplus income to borrow millions of dollars for investment properties and that will end with them getting the full pension for longer as the excessive leverage and "tax deductible" interest costs wipe them out.

Tashon
23/04/2014 10:47:22 AM

I agree. The only problem is that this 'research paper' will be widely published and referenced in the public arena, whilst once again our voices will not be heard.

John Walkeron
23/04/2014 10:17:02 AM

what rubbish... attack those who work and study hard and become less dependent on the age pension.... yet our socialist based friends want to make us even more dependent on the State.... remember the State can only pay out what it takes from other people... the tax payer...Check out the credentials of the authors

Mark Thompsonon
23/04/2014 10:07:59 AM

So let's get this right, the well heeled are the primary beneficiaries of current super tax concessions, while the battlers miss out. Hey Australian Institute think tank, who do you think pay mega taxes to care for the battlers? Yes, that's right the well heeled. So, its all stick and no carrot to make yourself a self funded retiree.

Martin Bon
23/04/2014 9:59:39 AM

Dumbest thing I have read in a long time. At least there are people investing for their own retirement now. Slash the concessions and increase the age pension and you would cause one hell of a large funding shortfall. Just when you think things cant get any weirder you come across this rubbish. Unbelievable. And they live amongst us.